Analyzing International Relations and American Politics

Why China’s Forced Technology Transfers Aren’t so Bad

I have been catching up on Scott Sumner’s blog posts recently, and I came across this very interesting article discussing how China should deal with Trump’s trade antics. The article is interesting throughout, but I found this part particularly stimulating:

What about Chinese rules that force foreign companies to provide intellectual capital as a pre-condition for entering the Chinese market? It’s hard for me to get worked up about this issue, for a number of reasons:

1. The US does far worse things, such as putting extreme sanctions on companies that do business with Iran, even if those companies are located in countries that have perfectly good relations with Iran, and who support the Iran deal along with 90% of the rest of the world. The US is a big bully that tries to force the whole world to do as we do. We also bully smaller countries like Canada in international trade disputes, often ignoring our own agreements. We are the last people who should be criticizing China for not playing by the rules.

2. One can make a good case that it’s efficient for foreign companies to be forced to transfer technology to China. Intellectual property laws are too restrictive, and the benefit of the technology to the 1.4 billion people in China probably far exceeds the cost to the companies and their stockholders. And who are we to complain about a country using its size to get its way?

From a fairness perspective, keep in mind that China’s size is a disadvantage in international trade. China contains by far the most homogenous large population anywhere; indeed there is nothing else on Earth like the 1.26 million billion strong Han ethnic group. This means that China is constantly suffering from disadvantageous terms of trade whenever it goes into a new industry. In contrast, Switzerland can specialize in a few industries without driving prices down to rock bottom. So from a “fairness” perspective, the forced technology transfers merely offset the huge disadvantage China faces in trade due to its massive size and homogeneity. (This homogeneity is a gold mine for US corporations—why shouldn’t they have to “pay to play”.)

I think these are excellent points, and I agree both that IP protections are quite excessive in the West and that, ceteris paribus, boosting Chinese growth and innovation will have massive positive externalities both in terms of reducing global inequality and boosting global productive capacity and quality of life. However, I think that the problem is much broader than Sumner acknowledges. Forced tech transfers are just one component of a much bigger issue involving Chinese SOE-related subsidies, tariff shenanigans, and general unwillingness to respect international economic regimes. Furthermore, focusing narrowly on tech transfers ignores the obviously illegal practice of hacking into foreign corporations to steal their R&D and gain a competitive edge. Ultimately, China is directly responsible for creating a significant amount of instability in the global trade regime (as is Trump), and this is being realized both in the U.S. and E.U. Addressing these issues will require a coalition of economic heavyweights, and I think IP theft and non-reciprocal investment restrictions might serve as a useful rallying cry. It’s also worth pointing out that as long as China continues to use catch-up growth to expand its economy, riding the coattails of Western companies and government labs, its full innovation potential will not be realized.